Going into Q4, we maintain our positive growth scenario, with emerging market equities expected to eventually rebound. Still, given the risk of further US tariffs and potential escalation, we add a defensive tilt to our sector preferences through healthcare.

We continue to expect the cyclical IT, financials and energy sectors to outperform and keep a negative view on industrials and utilities. Regionally, we favor emerging markets over Eurozone equities and keep our preference for the defensive Swiss market.

Jessie Gisiger Head of Credit and Equity Strategy

World equity market performance continues to paint a benign picture of the economic environment, with the MSCI AC World delivering a total return of above 4% YTD (as of 05/09/2018). Still, performance among regions has been diverging strongly, with US stocks clearly in the lead, but Japan and, more recently, emerging markets (EMs) lagging. Assuming continued positive growth, the latter should eventually recover, which should offer upside potential for global equities in Q4 and the first half of 2019 in our view.

Emerging markets, Switzerland still preferred While the potential for US tariff measures to trigger a full-blown trade war remains a credible risk, especially for EMs and Europe, progress on EU/US trade and NAFTA shows potential for improvement. We therefore prefer EMs over Europe in light of better valuations and as Chinese stimulus measures are likely to boost industrial activity. We maintain our positive stance on Swiss equities given their defensive nature. As the risk asymmetry from trade tariffs is likely to remain in place, we believe option structures that offer protection for downside risk as well as some upside participation are an interesting way to weather challenging market conditions.

Healthcare: Room for positive EPS/sales growth revisions The global healthcare sector generates more than 50% of revenues in developed markets (mainly the USA). As such, it is likely to be more immune to a potential escalation of the trade dispute. The sector also has more pricing power, with the global population aged 65 and over continuing to grow (8.8% in 2017, according to the World Bank). Companies continue to achieve higher net prices along with increased volumes, leading to a positive revision in sales growth and EPS numbers. Moreover, the intense debate on US regulatory risk has not taken place. Technical factors also indicate that the sector offers potential for further outperformance. Our conviction is reinforced by the sustainable momentum of merger and acquisition activity in biotech.